June 28 (Bloomberg) -- Hong Kong stocks are set for the
biggest decline among developed markets this half as concern
about China’s economy drives valuations 22 percent below the
five-year average.

The Hang Seng Index tumbled 9.8 percent in 2013, trailing
the Standard & Poor’s 500 Index by the most in 15 years and
wiping more than $145 billion from the value of shares. The
losses dragged the gauge’s valuation to 9.7 times estimates
earnings, compared with a five-year average of 12.5, according
to data compiled by Bloomberg.

JPMorgan Asset Management and Goldman Sachs Group Inc. say
Hong Kong stocks may get even cheaper as a manufacturing
slowdown in China collides with the worst cash shortage in a
decade. The waning outlook for the world’s second-biggest
economy is exacerbating declines spurred by the U.S. Federal
Reserve’s plan to dial back unprecedented stimulus measures.

“We’ll wait for a better entry point,” Grace Tam, a Hong
Kong-based global market strategist at JPMorgan, which oversees
about $1.5 trillion, said in a phone interview. “China’s data
continues to be weak. They’re not going to do any stimulus
because they now want to focus on structural reforms and
controlling credit activity.”

The Hang Seng Index’s drop, the biggest among 24 developed
equity markets tracked by Bloomberg, compares with an 12 percent
climb for the S&P 500. That’s the Asian gauge’s worst relative
performance since the first half of 1998, data compiled by
Bloomberg show.

Losses accelerated this month after preliminary data showed
a deepening Chinese manufacturing contraction and on concern
surging money-market rates will derail the economy.

Biggest Declines

“The outlook for growth remains lackluster,” Timothy Moe,
joint head of economics, commodities and strategy research in
Asia for Goldman Sachs, wrote in an e-mail June 26, saying he
maintains a cautious view on Hong Kong shares.

Property and utility firms posted the largest declines this
quarter. Industrial & Commercial Bank of China Ltd., the world’s
largest lender, slumped 13 percent since the end of March,
rising on just three days in June. China Overseas Land &
Investment Ltd., the largest mainland developer listed in Hong
Kong, declined 9.1 percent in the same period.

Rally Reverses

Stocks traded in the city surged from September through the
end of January, beating returns on the S&P 500 during the
period, as central banks from the U.S. to Europe pumped cash
into the global financial system. The Hong Kong Monetary
Authority spent almost $14 billion from October through December
to defend the local currency’s peg to the greenback amid demand
for assets in the city.

The Hang Seng reached the highest close in almost two years
on Jan. 30, before beginning a 14 percent slide. Mainland firms
make up more than half of Hong Kong’s market value, according to
Hong Kong Exchanges & Clearing Ltd.

The Hang Seng China Enterprises Index of mainland shares
listed in the city dropped 25 percent since Feb. 1 to enter a
bear market this month. The measure has given back all its gains
since Sept. 13 when Federal Reserve Chairman Ben S. Bernanke
pledged his central bank will buy bonds until the economy gets
closer to his goals.

Declines steepened after interbank lending rates in China
surged as the government and People’s Bank of China clamp down
on riskier lending.

The H-share gauge is trading at 6.8 times estimated
earnings, 37 percent below its five-year average of 10.8, after
this month touching the lowest valuation since the 2008 global
financial crisis. This compares with 14.5 times projected profit
for the S&P 500, according to Bloomberg data.

Supportive Valuation

“The valuation is supportive, assuming the PBOC will clean
up any outstanding issues in the interbank market,” Erwin
Sanft, head of China and Hong Kong equity research at Standard
Chartered Plc, said in a telephone interview June 25. “We
should see a market rally.”

The PBOC provided liquidity to some financial institutions
to stabilize money-market rates and will seek to ensure steady
markets, according to a statement posted to its website June 25.
That was the first public confirmation of central bank action to
ease a crunch that sent China’s overnight repurchase rate to a
record.

Premier Li Keqiang is seeking to wring speculative lending
out of the nation’s banking system after credit expansion
outpaced economic growth.

“The PBOC has basically declared war on the shadow banking
industry,” said Michael Shaoul, Chairman and CEO of Marketfield
Asset Management where he helps manage the MainStay Marketfield
fund that beat 96 percent of its peers in the past five years,
in a Bloomberg TV interview June 26. “I expect the PBOC to win
that war. Unfortunately that’s going to come at great cost to
the domestic Chinese economy.”